Nigeria's banking sector could face increasing financial pressure in the coming decades as climate change and the global shift away from fossil fuels reshape key sectors of the economy, according to Fitch Ratings.
In a new report titled "African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving," the global rating agency warned that while climate-related risks remain manageable in the near term, their impact on African financial institutions is expected to become significantly more pronounced over time.
The report identified Nigerian banks as among the most exposed on the continent because a substantial portion of their loan portfolios is tied to the oil and gas industry as well as agriculture—two sectors facing growing risks from global decarbonisation efforts and increasingly severe weather events.
According to Fitch, banks across Africa are confronting a combination of transition risks arising from climate policies and physical risks linked to extreme weather, both of which could weaken asset quality and pressure credit profiles over the coming decades.
Highlighting Nigeria's vulnerability, the agency said a large share of banks' lending is concentrated in industries that could be adversely affected by stricter emissions policies, technological advancements and changing investor preferences.
"Oil and gas, mining, and heavy industry remain central to economic activity in several countries, with Nigerian banks among the most exposed due to the country's reliance on hydrocarbons and agriculture," Fitch stated.
The agency noted that tougher international climate commitments could reduce profitability for carbon-intensive industries while leaving some assets "stranded," increasing credit risks for lenders with concentrated exposure to those sectors.
Agriculture, another major pillar of bank lending in Nigeria, is also becoming increasingly vulnerable. Fitch warned that more frequent floods, prolonged droughts and other extreme weather events could significantly affect agricultural productivity and borrowers' ability to repay loans.
The report explained that worsening climate conditions could erode collateral values, weaken repayment capacity and ultimately result in higher credit losses across the banking sector.
Beyond direct environmental risks, Fitch pointed to the growing regulatory response to climate change across Africa. Nigeria is currently developing carbon-pricing mechanisms and carbon-market frameworks as part of its broader climate commitments.
While such initiatives support long-term sustainability objectives, the agency cautioned that they could increase operating costs for businesses in carbon-intensive sectors, creating additional pressure on borrowers and, by extension, banks' loan performance.
Fitch observed that transition risks are expected to dominate the banking industry's outlook in the short to medium term. However, by 2050, physical climate risks—including rising temperatures, flooding, drought and other environmental hazards—are projected to have an even greater impact on economic growth and financial stability.
West Africa was identified as one of the regions most vulnerable to climate change, with Nigeria expected to experience significant indirect economic consequences.
According to the report, climate-related disruptions could reduce household incomes, weaken corporate earnings and increase macroeconomic volatility, all of which may translate into higher credit risks for financial institutions.
The agency further warned that real estate and agriculture-backed collateral could gradually lose value, increasing loan-to-value ratios and forcing banks to make higher impairment provisions.
Using its proprietary Climate Vulnerability Signals (Climate.VS) framework, Fitch estimated that Nigeria could record a combined climate-risk score of between 50 and 55 by 2050, placing it in the same risk category as Ghana, Egypt, Kenya and South Africa.
Despite the challenges, Fitch said the transition also presents significant opportunities for banks willing to adapt early.
The report highlighted green finance, sustainable lending and climate-focused investment products as emerging growth areas capable of helping lenders diversify revenue streams while strengthening long-term resilience.
To position themselves for the changing landscape, the agency recommended that banks incorporate climate considerations into their risk-management frameworks, diversify sector exposure and actively support customers in transitioning to lower-carbon business models.
Fitch also noted that regulatory oversight of climate-related financial risks is increasing. It said the Central Bank of Nigeria has begun developing frameworks aimed at improving climate-risk classification, governance and transparency across the financial sector.
The agency warned that institutions that fail to adjust to evolving climate expectations could face reputational damage, declining investor confidence and more difficult access to funding as global investors increasingly favour institutions with stronger sustainability credentials.
Nigeria, Fitch observed, faces the complex task of balancing economic growth with its climate commitments. While the country remains heavily dependent on oil and gas revenues and possesses vast natural gas reserves, it has also committed to reducing greenhouse gas emissions under the Paris Agreement.
The report concluded that although the transition away from carbon-intensive industries is likely to be gradual, Nigerian banks cannot afford to delay preparations.
"Institutions that effectively manage climate risks and capitalise on emerging green finance opportunities are expected to be better positioned to remain resilient and support sustainable economic growth," the report said.
The latest assessment follows another warning issued by Fitch last month concerning Nigeria's proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank.
In its report, "Emerging Market Sovereigns' Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility," the rating agency cautioned that while TRSs could offer cheaper financing and broaden funding sources, they also carry "significant structural and transparency risks" that could obscure sovereign debt exposure and complicate any future debt restructuring.